Europe's Twin Crises: the Logic and Tragedy of German Power

2020

This paper analyzes recent macroeconomic developments in the eurozone, particularly in Germany. Several economic indicators are sending signals of a looming German recession. Geopolitical tensions caused by trade disputes between the United States and China, plus the risk of a disorderly Brexit, began disrupting the global supply chain in manufacturing. German output contraction has been centered on manufacturing, particularly the automobile sector. Despite circumstances that call for fiscal intervention to rescue the economy, Chancellor Angela Merkel's government was overdue with corrective measures. This paper explains Germany's hesitancy to protect its economy, which has been based on a political and historical ideology that that rejects issuing new public debt to increase public spending, thus leaving the economy exposed to the doldrums. The paper also considers serious shortcomings in the European Union’s (EU) foreign and defense policies that recently surfaced during...

SSRN Electronic Journal, 2000

This paper investigates the causes behind the euro debt crisis, particularly Germany's role in it. It is argued that the crisis is not primarily a "sovereign debt crisis" but rather a (twin) banking and balance of payments crisis. Intra-area competitiveness and current account imbalances, and the corresponding debt flows that such imbalances give rise to, are at the heart of the matter, and they ultimately go back to competitive wage deflation on Germany's part since the late 1990s. Germany broke the golden rule of a monetary union: commitment to a common inflation rate. As a result, the country faces a trilemma of its own making and must make a critical choice, since it cannot have it all-perpetual export surpluses, a no transfer / no bailout monetary union, and a "clean," independent central bank. Misdiagnosis and the wrongly prescribed medication of austerity have made the situation worse by adding a growth crisis to the potpourri of internal stresses that threaten the euro's survival. The crisis in Euroland poses a global "too big to fail" threat, and presents a moral hazard of perhaps unprecedented scale to the global community.

This book discusses how the global financial crisis induced the ‘Great Recession’ and triggered problems within the eurozone regarding sovereign debt. The authors argue that the failure of the eurozone to meet any convergence criteria, together with unjustified emphasis placed upon unproven rules and institutions derived from contemporary neoliberal macroeconomic thinking, was an accident waiting to happen. Additionally, a series of potential remedies is proposed, ranging from a critical evaluation of solutions that the EU has already instigated (moral suasion and financial relief measures) together with a series of alternative propositions (fiscal federalism and a ‘European Clearing Union’). Moreover, the analysis is extended to the collapse of the eurozone and to options for national economic self-governance.

Euro crisis displayed its full blow in the spring of 2010. Its dynamics revealed deep-seated structural flaws at the core of the EMU. The productive Germany is tied via the euro currency union to countries that have lower productivity rates and inefficient economies. This union has been beneficial to the countries of Southern Europe so far since EMU inception, as it provided them with cheap credit. EMU showcased its problematic institutional design. Compared to mature federations, the institutional design of EMU is incomplete. On the one hand, there is a strong ECB that decides monetary policies for the entire euro area. At the same time, there is a lack of macroeconomic policy coordination for the same area. The budgetary and fiscal policies are set by governments of national states. This is of great concern for the vitality and robustness of the EMU in the context of soft constraints imposed by the Stability and Growth Pact. In the first part, this paper will highlight basic structural problems that led to the current crisis of confidence in the common European currency. The second part intends to discuss the lack of monetary and fiscal policy coordination, while the third part analyzes monetary and fiscal responses to the crisis by the EU institutions and national actors. The fourth part seeks to portray some possibilities for overcoming deep-seated structural imbalances, and questions the likelihood of “gouvernement économique” as a new stage in European integration.

This book discusses how the global financial crisis induced the ‘Great Recession’ and triggered problems within the eurozone regarding sovereign debt. The authors argue that the failure of the eurozone to meet any convergence criteria, together with unjustified emphasis placed upon unproven rules and institutions derived from contemporary neoliberal macroeconomic thinking, was an accident waiting to happen. Additionally, a series of potential remedies is proposed, ranging from a critical evaluation of solutions that the EU has already instigated (moral suasion and financial relief measures) together with a series of alternative propositions (fiscal federalism and a ‘European Clearing Union’). Moreover, the analysis is extended to the collapse of the eurozone and to options for national economic self-governance.

Whatever the initial unwarranted optimism, the developments that followed the collapse of Lehman Brothers have struck at the heart of the euro, plunging into crisis the power strategies linked to it. The higher growth rates in the ‘peripheral’ European economies were accompanied by both a fast reduction in cost of domestic borrowing and a significant inflow of foreign investments (of various forms). This caused lasting surpluses in the financial accounts. The concomitant deficits in the current accounts mirror exactly this increase of the domestic demand and the inflow of foreign investments. While the imbalances in the financial accounts within the Eurozone and the expansion of the domestic banking systems offset the pressures imposed upon labor by the mechanism of the euro, they nevertheless shaped an unstable and vulnerable context of symbiosis which did not delay to come apart after the recent financial meltdown. In this context, fiscal consolidation and policies of recession are the only choice of the capitalist power if the neoliberal architecture of Eurozone is to be left intact.

Contributions to Brancaccio and Fontana (2011) look at a variety of aspects of the current crisis, some of them focusing on the contingent financial causes, others on the underlying contradictions of capitalist economies. In this context, less attention has been paid to the role of Europe and particularly Germany. Europe has not been distinguished by an assertive and cooperative economic policy stance in the aftermath of the current crisis. German mercantilist policies are said to be behind the European policy stance and a source of regional and global imbalances. After a brief examination of the main pillars of European economic policy and German behaviour during the present crisis, these notes suggest an embryonic interpretation of the origins of mercantilist behaviour, dwelling on the nature of mercantilism in economic theory and commercial practice, and of the allegedly German mercantilist model. The suggested interpretation is that in the German case, the national mystique of a...

T he financial crisis gripping the eurozone countries seems incredibly complex, and although the reasons why their finances have come to grief are quite simple, the solution will not be easy. For the eurozone to resolve its crisis requires the political will to undertake painful measures, with serious distributional effects. As long as certain groups seek to avoid those costs, resolution of the crisis will be elusive.

Europe's Economic and Monetary Union was presented in terms of an idealized, teleological narrative of 'ever closer union' that obscured substantive conflicts within and among the member states of the eurozone as well as the EU as a whole. Despite its limitations the narrative persisted, because it was instrumentalized by powerful social forces and states and reproduced by the mainstream European studies academic cohort, which was strongly influenced by the European Commission. At the present time economic stagnation is giving rise to demands from Keynesian and heterodox quarters for an alternative to neoliberal austerity. However, the resilience of austerity should be understood not primarily as a result of a dominant, if flawed, intellectual discourse, but rather as an expression of Europe's distinctive power relations and the imperatives of German export mercantilism.

Throughout the last years, the Euro-zone has been facing a severe crisis jeopardising its very existence. The research question this article seeks to address is two-fold: how is the Euro crisis framed by Germany and its Euro-zone partners and why in this way? The importance of successfully addressing this research question rests upon the idea that the Euro crisis provides a very useful opportunity to explore the way framing unfolds and if, then, it can offer practical policy solutions. Thus, the question is not how policy problems are formally and objectively defined, but how these problems are defined by key political actors.

Journal of Post Keynesian Economics, 2011

The causes of the recent sovereign debt crisis within the eurozone are examined from the perspective of the peculiar institutional framework inherited from the Maastricht Treaty of 1992. The article argues that German neomercantilism is at the very core of Europe's descent into a seemingly irreversible phase of stagnation. In the absence of fiscal federalism, the sovereign debt crisis will only worsen, pushing the eurozone into a possible phase of debt-deflation.

Competition & Change, 2015

Europe’s Economic and Monetary Union was presented in terms of an idealized, teleological narrative of ‘ever closer union’ that obscured substantive conflicts within and among the member states of the eurozone as well as the EU as a whole. Despite its limitations the narrative persisted, because it was instrumentalized by powerful social forces and states and reproduced by the mainstream European studies academic cohort, which was strongly influenced by the European Commission. At the present time economic stagnation is giving rise to demands from Keynesian and heterodox quarters for an alternative to neoliberal austerity. However, the resilience of austerity should be understood not primarily as a result of a dominant, if flawed, intellectual discourse, but rather as an expression of Europe’s distinctive power relations and the imperatives of German export mercantilism.

Europe, which focuses on current EU political and policy debates (see back cover for more information). Unless otherwise indicated, the views expressed are attributable only to the authors in a personal capacity and not to any of the institutions with which they are associated. ISBN: 978-94-6138-213-9 Available for free downloading from the CEPS (http://www.ceps.eu) and EPIN (http://www.epin.org) websites

Much of the work examining the Eurozone crisis focuses on either the role of peripheral European states’ current account deficits, or German neo-mercantilist policies that promoted its export surplus. This paper considers how German financialization and input on the Eurozone’s financial architecture promoted those deficits, increased European systemic risk, and facilitated the onset of Europe’s subsequent crises. It argues that the increase in German financial sector competition encouraged those banks’ increase in securitization and participation in global capital markets, as well as German policy-makers’ support for financial liberalization embedded in the Maastricht Treaty. Financial liberalization of the Eurozone created a new marketplace for German financial institutions, which increased the risk of crisis as current accounts diverged between core states like Germany and peripheral states like Greece. Once global financial crisis ensued in 2008, German losses on international securitized assets prompted a retrenchment of domestic and international lending, paving the way for the Eurozone’s sovereign debt crisis. Reexamining the role of financial liberalization in facilitating German and European financial crises may prevent the Eurozone from repeating these performances in the future, at significant domestic, European, and global cost.